'Proof is in the pudding'

While state lawmakers have been mulling changes to Alaska’s oil tax system on the North Slope for the last several years, interest, exploration and production has been increasing in Cook Inlet.

Area lawmakers and industry representatives point to five specific tax credits and incentives on the books that have led to such activity. And, while credits for oil exploration have recently come under a statewide microscope, those who praise the Cook Inlet’s credits agree — if it ain’t broke don’t fix it.

“I think the proof is in the pudding,” said House Speaker Mike Chenault, R-Nikiski, of the credits and Cook Inlet. “We have exploration companies out there that are drilling not only onshore but offshore and the tax credits seem to be working.”

Those who agree can breathe easy — Cook Inlet credits were not affected by the recent passage of Senate Bill 21, which focuses on reworking the tax system as it relates to the North Slope’s declining oil fields.

“These credits will be the same if Senate Bill 21 is signed into law,” said Lennie Dees, audit master for the tax division of the Alaska Department of Revenue.

Dees is also of the mind that Cook Inlet credits have been responsible for increased production of oil and gas, the latter of which heats and energizes most of Southcentral.

“What we hear from the companies is that they like the credits and I think that some of them do things that they wouldn’t otherwise be able to do without them,” Dees said.

From an industry perspective, the economics of operating in Cook Inlet are much different than the North Slope, she said, and as such the two have always had different fiscal regimes.

For now, Moriarty said, the tax system and credits in place for Cook Inlet do not need any major changes, save, perhaps, for the extension of some credits that expire in 2016.

“We’ve got companies that are looking and are investing lots of money to rejuvenate the aging infrastructure there as well as looking for new stuff,” she said. “So I think when you have companies looking at both trying to extract more out of existing fields as well as explore for new opportunities, that’s a good sign for the Cook Inlet.”

Rep. Kurt Olson, R-Soldotna, said he thinks most other state lawmakers would agree.

“Which is a surprise after what we saw with ACES where we had all sorts of unintended consequences,” Olson said. “But not in Cook Inlet.”

Cook Inlet credits could be considered substantial — a company can be reimbursed up to 65 percent in the area for its operations even before it produces any resources by combining several credits. Once the company starts producing and has a tax liability, it could have all of its production tax eliminated — up to $12 million annually — if it produces less than 100,000 BTU equivalent barrels per day through the small producer credit.

“It just comes down to basic economics,” Moriarty said. “They do their modeling and the economics of investing in Cook Inlet are challenging as it is.

“It is not like they are paying no tax — they’ll still pay a royalty, they’ll still pay property tax, corporate income tax ... so it’s a way to incentivize companies to come to Cook Inlet so that you can reap those benefits of more jobs, more local tax revenue, more opportunity for your contracting community, as well as more production.”

Chenault justified the inlet’s taxes by saying that less tax means cheaper energy for area residents.

“Let’s say they find natural gas,” he said. “Any tax that’s paid on that ... would actually be coming out of the pockets of the local consumer. I mean that’s one of the reasons the tax rates were driven down is that we know the majority of gas in Cook Inlet is utilized for the consumer market.”

Chenault said his hope is to get companies above the 100,000 barrel threshold by helping them start in the area and letting them build resources, reserves and supply.

Moreover, Olson pointed to the initial reason for some of the credits’ formation as part of the 2010 Cook Inlet Recovery Act — Southcentral was getting warnings of gas shortages from producers and utilities.

“It was more vital from that standpoint because we were looking down the barrel of a gun that was getting ready to go off in about two or three years,” he said.

But there were no guarantees that what the state passed would bridge looming gas shortages. Ultimately, Olson said, how a company uses the Cook Inlet’s incentives depends on a variety of factors.

“Each of ‘em would have a different story and I think that’s why there were so many different types of credits,” he said.

Despite what he considers to be a successful tax package, Chenault said he is still curious about why some producers use some credits and not others. He said he suspects it is based on individual company’s philosophies of operation.

“One of these days I think we ought to go back and look at all the tax credits we have offered the Cook Inlet, see which ones are working, which ones aren’t,” he said. “If there is a credit that’s not working, we need to figure out why it didn’t work, or maybe take it off the books. If we find one that’s really working, that’s really producing results, well, maybe we need to look at that.”